The Future of Medicare Supplement 7th Annual Market Projection

The Future of Medicare Supplement 7th Annual Market Projection 2017 Jared Strock, FSA, MAAA Douglas Feekin, ASA, MAAA

Authors Jared Strock, FSA, MAAA Douglas Feekin, ASA, MAAA Introduction The Medicare Supplement market continues to offer long-term sustainability. Just over 75 million individuals are expected to be enrolled in the Medicare program by 2026 (a 32% increase over 2016). This means that by 2026 roughly 20 million more individuals will be added to the Medicare program with another 10 million being added by 2035 (Table 2). CSG Actuarial research indicates Medicare Supplement enrollments will continue to grow markedly over the next 10 years, creating ever-increasing opportunities for insurance carriers, agents, and marketing organizations in the Medicare Supplement market (Graph 1). 1. 2017 Medicare Trustees Report 2. NAIC Medicare Supplement 3. CMS.gov 4. Other Public Company 5. CSG Actuarial Projections Enrollees 30,000 25,000 20,000 15,000 10,000 5,000 - Year Graph 1: Senior Insurance Enrollee Forecast to 2026 Medicare Supplement Enrollment (1000s) Other Medicare Enrollees (1000s) Medicare Advantage Enrollment (1000s) Methodology There is a minimal amount of information available regarding Medicare Supplement market projections. CSG Actuarial has compiled data from various sources and developed actuarial models to project future Medicare Supplement enrollments and premium levels over the next 10 years. Current Medicare Eligibility Assessment To determine how the Medicare Supplement market is expect to grow over the next 10 years, we first evaluated the current Medicare population using the following demographic factors: Age, gender Eligibility Status Income Level Health Status Area of Residence Living Arrangement Plan Type (Medicare Supplement, Medicare Advantage, Other) 1

Table 1, following, provides a current percentage snapshot of each of these characteristics used in our projection. Category Table 1 Medicare Beneficiary Data (in 1000s) - 2016 All Enrollees Medicare Supplement Medicare Advantage Number % Dist Number % Dist Number % Dist Total Enrollment 56,800 13,094 18,658 Eligibility Status Aged 47,750 84.1% 12,756 97.4% 16,148 86.5% Disabled 9,050 15.9% 338 2.6% 2,497 13.4% Age Under 45 Years 1,943 3.4% 70 0.5% 363 1.9% 45-64 Years 7,107 12.5% 268 2.0% 2,134 11.4% 65-74 Years 26,783 47.2% 7,036 53.7% 8,899 47.7% 75-84 Years 14,281 25.1% 4,060 31.0% 5,173 27.7% 85 Years or Older 6,687 11.8% 1,660 12.7% 2,075 11.1% 1. 2017 Medicare Trustees Report 2013 Medicare Beneficiary Survey 2. NAIC Medicare Supplement 3. CMS.gov 4. Other Public Company Disclaimer Limited information was available for some of the categories and certain assumptions have been made based on analysis of the data. Gender Male 25,829 45.5% 5,532 42.3% 8,092 43.4% Female 30,971 54.5% 7,562 57.7% 10,566 56.6% Annual Income $10,000 or Less 6,112 10.8% 351 2.7% 1,905 10.2% $10,001-$20,000 12,860 22.6% 1,950 14.9% 4,890 26.2% $20,001-$30,000 10,167 17.9% 2,412 18.4% 3,985 21.4% $30,001-$40,000 7,140 12.6% 1,976 15.1% 2,480 13.3% $40,001-$50,000 5,521 9.7% 1,644 12.6% 1,642 8.8% $50,001 or More 14,995 26.4% 4,761 36.4% 3,756 20.1% Area of Residence Urban 43,827 77.2% 9,230 70.5% 15,934 85.4% Rural 12,973 22.8% 3,864 29.5% 2,724 14.6% Health Status Excellent 9,571 16.9% 2,653 20.3% 3,168 17.0% Very Good 16,392 28.9% 4,485 34.3% 5,472 29.3% Good 15,955 28.1% 3,757 28.7% 5,375 28.8% Fair 10,235 18.0% 1,600 12.2% 3,286 17.6% Poor 4,646 8.2% 599 4.6% 1,356 7.3% Living Arrangement Lives Alone 16,268 28.6% 3,938 30.1% 5,480 29.4% With Spouse 28,996 51.1% 7,548 57.6% 9,211 49.4% With Children 5,867 10.3% 816 6.2% 2,131 11.4% With Others 5,663 10.0% 792 6.0% 1,834 9.8% 2

Key Observations from Table 1: The Medicare Supplement market has a substantially lower proportion of disabled insureds than the Medicare Advantage market. Income distribution among products shows that Medicare Supplement plans typically appeal to insureds with higher annual income on average. The proportion of rural insureds who have a Medicare Supplement plan is significantly higher than the proportion of rural insureds who have a Medicare Advantage plan. The Medicare Supplement market has a higher proportion of healthier individuals compared to the Medicare Advantage market. About 70% of all Medicare Supplement beneficiaries live with someone else. The majority of carriers selling Medicare Supplement today offer some version of the household discount. Medicare Eligibility Projection Table 2 features the overall Medicare beneficiary projection. The growth projected by the 2017 Medicare Trustees Report is being driven by the well documented influx of baby boomers now turning 65 and joining the Medicare program. Source 1. 2017 Medicare Trustees Report Table 2 Total Medicare Beneficiaries % Increase Year (1000s) By Year 2006 43,436 1.9% 2007 44,368 2.1% 2008 45,500 2.6% 2009 46,604 2.4% 2010 47,720 2.4% 2011 48,896 2.5% 2012 50,874 4.0% 2013 52,504 3.2% 2014 54,115 3.1% 2015 55,542 2.6% 2016 56,800 2.3% 2017 58,625 3.2% 2018 60,337 2.9% 2019 62,178 3.1% 2020 64,060 3.0% 2021 65,937 2.9% 2022 67,832 2.9% 2023 69,683 2.7% 2024 71,482 2.6% 2025 73,305 2.6% 2026 75,075 2.4%... 2035 86,178 1.5% 3

Historical Medicare Supplement Assessment To project the future of the Medicare Supplement market, we started by evaluating historical trends. Table 3 indicates Medicare Supplement policies in-force and premiums have rebounded the past nine years, fueled by an increase in annualized new premiums, which are up 91% since 2008. The increase in annualized new business premiums resulted in a leveling of the Medicare Supplement market penetration percentage from 2009-2013, followed by an increase in each year thereafter. In fact, the percentage of Medicare Beneficiaries who own a Medicare Supplement product increased 0.9 percent from 2014 to 2015, followed 0.8 percent from 2015 to 2016. 1. NIAC Medicare Supplement 2. 2017 Medicare Trustees Report 3. Other Public Company Table 3 Historical Medicare Supplement #'s (in 1000s) Total % of New Policies Total Average Medicare Annualized Year Inforce Premium Premium Beneficiaries Premium 2004 10,370 18,706,808 1,804 24.7% 2,000,000 2005 10,254 19,339,544 1,886 24.1% 2,100,000 2006 10,078 19,018,522 1,887 23.2% 2,100,000 2007 9,791 19,067,408 1,947 22.1% 2,100,000 2008 9,721 19,588,131 2,015 21.4% 2,200,000 2009 9,767 20,237,384 2,072 21.0% 2,500,000 2010 9,963 21,148,239 2,123 20.9% 2,850,000 2011 10,199 22,106,005 2,167 20.9% 2,850,000 2012 10,549 23,142,217 2,194 20.7% 3,100,000 2013 10,987 24,312,519 2,213 20.9% 3,350,000 2014 11,572 25,732,303 2,224 21.4% 3,600,000 2015* 12,372 27,334,334 2,209 22.3% 3,900,000 2016 13,094 29,039,669 2,218 23.1% 4,200,000 *2015 numbers were updated from last year s report due to updated data files The growth in the Medicare Supplement market during the past nine years can mostly be attributed to three things: 1. The number of Medicare beneficiaries has grown by about 25% since 2008 (Table 2). 2. Growth in the Medicare Advantage program has slowed, which left more lives in traditional Medicare with the need to purchase a Medicare Supplement plan. The average growth rate for Medicare Advantage plans over the past eight years is less than half the Medicare Advantage growth rate over the previous three years and has coincided with an increase in the Medicare Supplement growth rate over that same time period (Table 4). The 2016 Medicare Advantage growth rate of 5.1% is the lowest growth rate since 2010. 3. Employers have continued to remove Medicare-aged retirees from their employer health plans, with some providing them with a stipend to purchase individual coverage. Due to this, the percentage of Medicare beneficiaries not in Medicare Advantage or Medicare Supplement plans has declined dramatically 4

the past 10 years ( Other column in Table 5 & Other Medicare Enrollees in Graph 1). As a result, the annual growth rate of Medicare Supplement beneficiaries has been at its highest rate in recent years coming in at 6.9% in 2015, followed by 5.8% in 2016 (Table 4). At the same time, the Medicare Advantage annual growth rate of beneficiaries dropped to 6.8% in 2015, followed by 5.1% in 2016, bringing the growth rate of Medicare Supplement and Medicare Advantage closer than it s ever been. 1. NIAC Medicare Supplement 2. CMS.gov Table 4 Historical Medicare Advantage & Medicare Supplement Growth - #s in 1000s Medicare Advantage Medicare Supplement Annual Average Annual Average Year Beneficiaries Growth Growth Beneficiaries Growth Growth Rate Rate Rate Rate 2005 6,005 10,254 2006 7,557 25.8% 10,078-1.7% 2007 8,933 18.2% 19.7% 9,791-2.8% -1.8% 2008 10,283 15.1% 9,721-0.7% 2009 11,303 9.9% 9,767 0.5% 2010 11,885 5.1% 9,963 2.0% 2011 12,628 6.3% 7.8% 10,199 2.4% 2.1% 2012 13,877 9.9% 10,549 3.4% 2013 15,146 9.1% 10,987 4.2% 2014 16,632 9.8% 11,572 5.3% 2015 17,761 6.8% 7.7% 12,372 6.9% 5.6% 2016 18,658 5.1% 13,094 5.8% Table 5 Historical non-med Adv & Med Supp Market Penetration - #s in 1000s Total Med Adv & Other % Year Medicare Med Supp Other of Total 2004 41,902 15,941 25,961 62.0% 2005 42,606 16,260 26,346 61.8% 2006 43,436 17,635 25,801 59.4% 2007 44,368 18,724 25,644 57.8% 2008 45,500 20,004 25,496 56.0% 2009 46,604 21,070 25,534 54.8% 2010 47,720 21,848 25,872 54.2% 2011 48,896 22,827 26,069 53.3% 2012 50,874 24,426 26,448 52.0% 2013 52,504 26,133 26,371 50.2% 2014 54,115 28,204 25,911 47.9% 2015 55,542 30,133 25,409 45.7% 2016 56,800 31,752 25,048 44.1% 5

These factors and our expectation of the degree to which they would continue were included in the development of CSG Actuarial s Medicare Supplement market projection. 1. 2017 Medicare Trustees Report 2. NAIC Medicare Supplement 3. CMS.gov 4. Other Public Company Medicare Supplement Projection CSG Actuarial s Medicare Supplement projection is featured in Table 6, following. Assumptions include: Demographics of current Medicare Beneficiaries are accurate. Demographics of future Medicare Beneficiaries will not experience a material change in the future. Current policy lapse rate and replacement rates will not experience a material change in the future. Annual Medicare Supplement claim and rate increase trends will not experience material changes in the future. The projection assumes average premiums will be level until dropping in 2020. Structure of Medicare and Medicare Supplement plans will continue as currently designed. Also considered in this projection were the effect of trends in Medicare Advantage, retiree health benefits, and other types of supplemental coverage. 1. 2017 Medicare Trustees Report 2. NAIC Medicare Supplement 3. Other Public Company 4. CSG Actuarial Projections Table 6 Historical and Projected Medicare Supplement #'s (in 1000s) Total Policies Inforce Total Earned Average % of Medicare New Annualized Year (End of Year) Premium Premium Beneficiaries Premium 2004 10,370 18,706,808 1,804 24.7% 2,000,000 2005 10,254 19,339,544 1,886 24.1% 2,100,000 2006 10,078 19,018,522 1,887 23.2% 2,100,000 2007 9,791 19,067,408 1,947 22.1% 2,100,000 2008 9,721 19,588,131 2,015 21.4% 2,200,000 2009 9,767 20,237,384 2,072 21.0% 2,500,000 2010 9,963 21,148,239 2,123 20.9% 2,850,000 2011 10,199 22,106,005 2,167 20.9% 2,850,000 2012 10,549 23,142,217 2,194 20.7% 3,100,000 2013 10,987 24,312,519 2,213 20.9% 3,350,000 2014 11,572 25,732,303 2,224 21.4% 3,600,000 2015 12,372 27,334,334 2,209 22.3% 3,900,000 2016 13,094 29,039,669 2,218 23.1% 4,200,000 2017 13,666 30,424,698 2,226 23.3% 4,400,000 2018 14,382 32,140,055 2,235 23.8% 4,700,000 2019 15,201 34,100,134 2,243 24.4% 4,900,000 2020 16,137 36,300,596 2,250 25.2% 5,100,000 2021 17,078 38,564,441 2,258 25.9% 5,400,000 2022 18,008 40,818,619 2,267 26.5% 5,800,000 2023 18,956 43,131,223 2,275 27.2% 6,100,000 2024 19,927 45,513,713 2,284 27.9% 6,400,000 2025 20,942 48,014,219 2,293 28.6% 6,800,000 2026 21,972 50,566,196 2,301 29.3% 7,100,000 6

Prior Projection Comparisons In last year s version of the Medicare Supplement Market Projection, CSG projected 13,000,000 policies to be inforce at the end of 2016, and the 2016 Earned Premium was projected to be $28,713,682,000, in line with actual results (Table 6). Current Market Activity and Possible Impacts to Future Medicare Supplement Consolidation As of last year s report, Aetna s proposed acquisition of Humana, and Anthem s proposed acquisition of CIGNA were both getting increased regulatory scrutiny, with the U.S Justice Department suing to block the acquisition attempts citing concerns that the mergers would increase health-care costs and simultaneously reduce choice for consumers. Since that time, Aetna s proposed acquisition of Humana, and Anthem s proposed acquisition of CIGNA have both been called off. CSG Actuarial does not believe any potential merger consolidation will negatively impact the growth in the market. Based on our market perspective, at least 10 new carriers have entered or are in the process of entering the Medicare Supplement market in the last two years. We expect there will continue to be new carriers entering the market based on the favorable demographics, cost effective TPA solutions, sophisticated distribution options and reinsurers actively looking for new partnership opportunities. Cost Sharing Plans and First Dollar Coverage As commonly reported, Plans G and N continue to grow and grab market share in the overall Medicare Supplement market. In 2016, Plans G and N made up over 19% of the lives in the Medicare Supplement market, up from only 5% in 2010. A large portion of the growth in market share for Plans G and N is at the expense of non first dollar coverage plans, as can be seen in Graph 2. Using data from the NAIC, CSG Actuarial grouped the Medicare Supplement lives for 2010 to 2016 into 4 categories: 1. Plans covering first dollar benefits (Plans C, F, and J) 2. Plans in Grandfathered States 3. Plans G and N 4. All Other Plans 7

GRAPH 2 - MEDICARE SUPPLEMENT DISTRIBUTION OF POLICIES BY PLAN First $ Plans Grandfathered States Plans G & N All Other Plans 22.6% 20.7% 18.0% 15.5% 13.2% 11.3% 10.0% 5.0% 6.3% 7.7% 10.7% 13.1% 15.6% 19.2% 5.7% 5.5% 5.2% 5.3% 5.3% 6.1% 4.6% Source 66.8% 67.4% 69.1% 68.5% 68.4% 67.0% 66.2% 1. NAIC Medicare Supplement 2010 2011 2012 2013 2014 2015 2016 This shift to Plans G and N is more obvious when looking at recent Medicare Supplement issued policies. Graph 3 below displays the same information as Graph 2, but is only including the prior 3 issue years for each experience year. In 2016, Plans G and N made up over 31% of the lives issued between 2014 and 2016 compared to 8% in 2010 (for lives issued between 2008 and 2010), while first dollar coverage plans have gone from 72% in 2010 to 60% in 2016. GRAPH 3 - MEDICARE SUPPLEMENT DISTRIBUTION OF POLICIES BY PLAN (3 YEARS) First $ Plans Grandfathered States Plans G & N All Other Plans 13.5% 12.8% 9.4% 5.1% 4.1% 4.0% 4.2% 7.9% 11.1% 14.1% 20.4% 23.4% 26.4% 31.6% 6.9% 6.5% 5.8% 6.1% 6.1% 6.0% 4.3% 71.6% 69.7% 70.8% 68.3% 66.4% 63.5% 60.0% Source 1. NAIC Medicare Supplement 2010 2011 2012 2013 2014 2015 2016 8

With the passage of H.R.2 Medicare Access and CHIP Reauthorization Act of 2015, Medicare Supplement policies will no longer be able to cover the Part B deductible as part of their benefits beginning January 1, 2020 for newly eligible Medicare Beneficiaries, thus eliminating first dollar coverage plans. The revisions to the model regulation were adopted by the NAIC in 2016, and the NAIC is recommending that states adopt the updates to the model regulation by 12/31/2017. Some of the details related to the updated model regulation are as follows: Plan F can still be sold after 2020 to individuals who were eligible prior to 2020, prior eligibles can keep their existing policies (even those that include the Part B deductible) newly eligibles will be able to elect Plans D and G in guarantee issue situations, carriers will be able to offer a high deductible Plan G starting in 2020. Due to this upcoming regulatory change, CSG Actuarial expects there will continue to be a gradual shift over the next few years to plans not covering first dollar benefits leading up to 2020 when all new entrants will need to purchase plans not covering first dollar benefits. This shift is taken into account in our projected new annualized premium and total premiums in Table 6. Carriers, agents, and marketing organizations will need to be strategic with how they price, market and sell products leading up to 2020 and then starting in 2020. Conclusions Recent results and future projections continue to suggest the Medicare Supplement market offers very strong opportunities for growth for carriers, marketing organizations, and agents. As covered in detail in this paper, some of the primary drivers of this future growth and opportunity will be 1) the overall growth in Medicare, 2) a decrease in Retiree Health Benefits, and 3) slowed growth in the Medicare Advantage program when compared to early years of Medicare Advantage. As the number of Medicare Beneficiaries continues to grow, from 57 million in 2016 to 75 million in 2026 (table 2), it is becoming clear that those same individuals will increasing turn to private insurance (both Medicare Advantage and Medicare Supplement) to help cover their insurance needs. While some individuals will continue to receive Retiree Health Benefits, get coverage through Medicaid, or choose Traditional Medicare Coverage without any sort of supplemental coverage (these combined are labeled Other Medicare Enrollees in Chart 1 and labeled Other in Table 5), these individuals will increasingly make up a smaller and smaller proportion of the total Medicare Beneficiaries. Beyond those primary drivers, CSG Actuarial believes other factors such as overall market stability and low barriers to market entry will also contribute to the future growth in the Medicare Supplement market. Stability in the market in recent years has been driven by lower claim trends that have led to lower annual premium rate increases and higher company profits. Low barriers to entry in the Medicare Supplement market are a result of numerous experienced TPAs, distributors and re-insurers available to provide 9

support as needed for new companies wishing to enter the Medicare Supplement market. Adding it all up, CSG Actuarial believes future growth trends within the Medicare Supplement market continue to be very positive. CSG Actuarial, LLC 11011 Q St. #101B Omaha, NE 68137 (855) 861-8776 www.csgactuarial.com 10